Pacific Fibre, Pacnet to bust Telecom cable monopoly

The threat to the 50% Telecom-owned Southern Cross Cable monopoly has moved another step closer to reality.

Pacific Fibre, backed by rich listers Sir Stephen Tindall, Sam Morgan and Rod Drury, today announced an alliance with Hong Kong and Singapore headquartered Pacnet to build a $US400 million undersea cable between Australia, New Zealand and the US.

The two companies will begin the process of selecting a vendor to lay the cable shortly, and say they will have it in service by 2013.

Competitive vendor bidding to lay create and lay the cable has seen the sticker price, which had already dropped to $500 million, fall another $100 million.

Tellingly, one industry insider told NBR that Pacnet was one of the largest - perhaps the largest - Southern Cross Cable wholesale partner.

Certainly, it was the highest profile neutral Southern Cross Cable reseller (Telecom Wholesale and Verizon, among others, also sell capacity to ISPs and others).

ISPs locked into contractsThe joint venture cannot expect business to simply walk in the door, however.

"Any competition in submarine cables is good for all parties as it guarantees diversity, redundancy and general wholesale bandwidth price drops.

"However, most of us are locked into term contracts with our current bandwidth providers so it is not simply a matter of switching overnight to who is the cheapest bandwidth provider."

Previously, a Southern Cross Cable marketing rep has bragged to NBR that the company has some big customers locked into deals until 2020.

50-50 venture - for the momentPacific Fibre's partnership with the more established Pacnet would be a 50-50 venture - at least for the moment, a spokesman told NBR this afternoon.

"It depends on the final allocation of fibre pairs, and any 3rd players, but it's 50/50 partnership for now," said the spokesman, who said the project was similar to the multi-partner Unity/Google cable between the US and Japan.

The crux of the partnership question will be whether a third party buys another "fibre pair".

A cable can have up to eight fibre pairs.

The current plan is for Pacific Fibre and Pacnet to have one pair each.

An additional investor could buy in and add a fibre pair to the project, albeit at extra cost.

"Each party can have its own terminating equipment [for its fibre pair], and other parties cannot see what they are doing," the Pacific Fibre spokesman said.

In the case of the Google/Unity cable, Pacnet is the largest investor with ownership of two of the five fibre pairs.

Pacific Fibre chief executive Mark Rushworth described the his company and Pacnet as "equal partners" at this point.

Winners, losersISPs, and customers, who consider that the Bermuda-incorporated Southern Cross Cable inflates prices will celebrate the news.

The losers are Telecom (NZX: TEL) and Pacific Fibre's wannabe transtasman partner Kordia, which promptly announced it was throwing in the towel.

Wither WellingtonAnother apparent loser is Wellington.

The capital, which originally appeared on Pacific Fibre promo maps showing a future cable joining Sydney, Auckland, Wellington and LA, is not featured in today's Pacific Fibre-Pacnet announcement - which outlines a cable between Sydney, Auckland and the West Coast of the US.

The Pacific Fibre spokesman said the Wellington landing point was always "optional.".

Telecom owns the Southern Cross Cable in partnership with Singtel Optus (which hold a 40% stake in the venture) and Verizon (10%).

It delivered Telecom an $80 million dividend last year - although the company has always maintained that the Auckland to Sydney stretch of its cable (that is, its monopoly leg) accounts for only a small percentage of its profit.

Heavy-duty partnerPacific Fibre recently raised around $1 million in a "friends and family" private equity round that included David Kirk and Gareth Morgan, among others.

But Pacnet will bring serious muscle to the venture.

The privately-held Australian company - a one-time $US420 million bidder for Telecom's AAPT division - owns and operates EAC-C2C, the region’s largest privately-owned submarine cable network at 36,800 km, with a design capacity of 10.24 Tbps, as well as EAC Pacific, which spans 9,620 km across the Pacific Ocean and delivers up to 1.92 Tbps of capacity between Asia and North America.

Asked today if Pacnet would participate in the current round of bidding for AAPT, which has every appearance of faltering, chief executive Bill Barney acknowledged his company had made two previous attempts to buy Telecom's Australian subsidiary. But it had no plans to participate in the latest attempt to sell the telco.

Faster than expectedSydney-based market analyst Paul Budde conceded that Pacific Fibre had been able to pull a deal together a deal faster than he had originally anticipated.

"This is good news," said the influential pundit, "and earlier than I expected."

"Australia and New Zealand "suffer" from the fact that they speak English and that such content is far away, in the US or UK.

"We therefore are relatively heavier users of international cable capacity than most other countries (for example, only Japanese speak Japanese so most traffic stays with the country).

"So we need more competitive cable in order to get our domestic prices down as they do depend on a larger extend on that international capacity."

The tech specsThe project will comprise of at least two fibre pairs with 64 wavelengths per fibre pair. By using the latest 40 gigabits per second (Gbps) per wavelength technology, the cable is expected to have a capacity of up to 5.12 terabits per second (Tbps), and will be further upgradeable to beyond 12 Tbps with future 100 Gbps per wavelength technology.

The 13,600 km cable will land in Sydney, Auckland and Los Angeles, and will also offer the most direct route between these landing points, delivering the lower latency connections that are being demanded by core customers.

The new cable will be built on a partnership model that allows Pacnet and Pacific Fibre to each own and operate a fibre pair on the new cable system, but share responsibility for the cable supply contract as well as operations and maintenance costs, Pacific Fibre said in a statement.